Seller’s look at Procurement Strategy

by Chris Arlen on March 3, 2011

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Smart sellers want to know how buyers buy. With Procurement’s increased authority in large service buys, knowledge of their best-practices is gold.

Although all Procurement departments don’t work the same way, A.T. Kearney’s Seven Steps for Strategic Sourcing provides insight into a best practice. Originally designed for information products, these Seven Steps have been adapted by Procurement departments for a wide range of service buying, including facility services.

For each of the Seven Steps we’ll define them and then list some ways sellers may be able to influence the process for a positive outcome, for both buyers and sellers alike.

Seven Steps for Strategic Sourcing

NOTE 1: The following is my simple version of a Procurement department’s revision of A.T. Kearney’s Seven Steps for Strategic Sourcing. I came across  A.T. Kearney’s and the Procurement’s version while consulting on an RFP process. The version that follows is mine, and not the original A.T. Kearney one. All mistakes here are mine.
NOTE 2: Not all Procurement departments use the A.T. Kearney process, or as sophisticated as to use best-practices.
NOTE 3: In the steps below sellers will be called suppliers. That’s how Procurement sees them.

Heads up. Eyes open. Onward from Procurement’s perspective.

STEP 1 ) Analyze category, spend & targets

Here Procurement is looking to understand the total financial spend by defining the category (i.e. janitorial, security, facilities management, etc.), then quantifying spend in that category at all locations company wide. This guides their choice of strategy, which can provide greater purchase efficiencies and negotiation leverage.

Procurement also seeks to understand the service needs of business owners (your customer contacts) and their end-users. Savings targets and performance baselines are identified for comparisons in later steps of the process.

Sellers’ Take

If you have industry benchmarks for your service’s cost, productivity, quality, etc. consider providing those to Procurement. This requires the benchmarks as well as access to the Procurement manager handling your service. If sellers can begin early and help to educate Procurement in the way they want to be educated, then there is potential for influence. However, the bulk of this step is primarily Procurement’s internal research.

For additional insight read “Procurement Talks: An Interview with Expedia“.

STEP 2 ) Generate supplier portfolio

Procurement looks for potential suppliers, ones capable of delivering service as they understand it from Step 1 above. They’ll also include suppliers from their business owners (your customer contacts). That saves them some time in filling out a potential suppliers list.

Procurement, together with business owners, will rough out supplier selection criteria and the evaluation process. Depending on the buy, Procurement may hold an Request for Information (RFI) to cull down suppliers to a pre-qualified manageable number.

Sellers’ Take

Consider getting on suppliers’ lists by reaching out to business owners through industry associations and professional conferences. Cold calls to Procurement generally only work if they’re looking for the service the supplier is calling about. It’s hit or miss with the call.

Again, see “Procurement Talks: An Interview with Expedia” for more insight.

STEP 3 ) Select sourcing strategy

Procurement has multiple sourcing strategies to choose from based on their analysis in Step 1. Here are 6 from A.T. Kearney, listed in no particular order:

* Volume Concentration – you’ve seen this as large contracts that roll all locations and/or services into a single contract/supplier.

* Specifications Improvement - re-scope or re-engineer service specifications for better, faster, cheaper.

* Best Price – renegotiating based on breaking apart services and/or making profit “buckets” visible

* Global Sourcing – seek new suppliers globally and/or develop new suppliers based on markets with high number of suppliers

* Joint Process Improvement – this happens to some degree with facility services, its where the customer’s staff does part of a task/job and the supplier’s staff does the other part

* Relationship Restructuring – relatively infrequent with facility services, this is where true strategic alliances and partnering occurs and where customers consider what they’ll make (in-house) vs. buy (outsource)

Sellers’ Take

Not much sellers can do here as this is primarily Procurement’s internal decision.

STEP 4 ) Hold RFP process

This is the part suppliers are most familiar with, the Request for Proposal (RFP). Procurement:

  • sends out the RFP to pre-qualified suppliers
  • a bid walk of locations takes place
  • questions are answered & distributed to all bidders
  • bid submittals are evaluated
  • a short-list of suppliers make in-person presentations
  • at last a decision is made

NOTE: A negotiation phase takes place before the final decision is made. Procurement begins negotiations, often with the top 2 supplier finalists. This is insurance in the event Procurement can’t reach final agreement with their top choice. It also gives Procurement the chance to further negotiate price and/or terms with their top choice by having a backup in place as leverage.

As an alternative to holding an RFP, or at the end of the RFP process, Procurement can still negotiate with the incumbent supplier, using the competitive bid data for better price and terms from the incumbent.

Sellers’ Take

This is the seller’s moment of truth. All time, effort and money spent before the RFP can be wasted if the seller’s proposal and presentation aren’t compelling, persuasive and business-case based.

For additional insight, there are a number of articles about proposals from Revenue-IQ.

STEP 5 ) Finalize contract & start-up plan

Procurement is busy tidying up its paperwork for contract document requirements, adjusting their spend forecast and finalizing savings measurement and its tracking methodology. This is also when the supplier’s implementation plan is fully integrated.

Sellers’ Take

Hope you’re the successful seller because it’s too late now for anything other than getting ready for the next RFP.

STEP 6 ) Integrate supplier

This is Procurement finalizing the organizational integration into budget adjustments, General Ledger code updates and getting setup in the A/P system.

Sellers’ Take

The horse has left the barn.

STEP 7 ) Vendor Management

It’s relatively rare that Procurement is involved with overseeing supplier performance, but it does happen and is a best practice. If involved, Procurement’s role is to monitor contract compliance, joint process improvement, savings tracking, and customer feedback and satisfaction levels.

Sellers’ Take

The incumbent supplier (a seller once again) can take the opportunity to include Procurement in any and all business meetings that review supplier performance and contract compliance. Keeping Procurement apprised of how well the supplier is doing is absolutely necessary for the inevitable rebid.

That’s It

Knowledge is power and understanding how Procurement operates, at least a few best practices, helps sellers influence the outcome for better results for both buyer and seller.

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Chris Arlen
President, Revenue-IQ

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